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High-Low Index

Aug 15, 2022 By Susan Kelly

An index called a high-low tracks stocks' 52-week highs/lows within a prevailing index. It is used for technical analysis, analysis charts, and past stock data to indicate the direction of the index or market - whether it will rise or fall. The high-low index can also be called a breadth indicator, which gauges the strength or weakness of an index.

When calculating a high-low index, the method known as the Record High Percent is used. To better grasp the direction in which an index is heading, one might use the high low index, which is nothing more than a simple moving average of Record High Percent. In most cases, a simple moving average that is a 10-day moving average will be used to calculate the Record High Percent. However, its usefulness might be extended for a greater period.

An average of the Record high percent is used to smoothen the volatility. This is done to understand market movements and the index better. A high-low index is often calculated using indexes that serve as proxies for the entire market, such as the S&P 500 or NASDAQ 100.

Understanding the High-Low Index

The high-low index can be calculated by simply taking the moving average of the 52-week highs or lows of the underlying index over a specified period. This is done using the Record High Percent Method. The Record High Percent must be calculated using a simple moving average over the past 10 days or another time period to calculate the high-low Index. The simple moving average will provide a more visual and easily understood trend for the underlying index.

The simple moving average of Record High Percent for 10 days can be obtained by adding the Record High percent's over the past 10 days and then dividing the sum by 10. You should note that the high-low index, a moving average of the RHP, is calculated by adding the newest observation to the equation.

Interpreting the High-Low Index

A high-low index of 50 or more indicates that more stocks are making 52-week highs than 52 lows. A reading below 50 indicates that more stocks are hitting 52-week lows than stocks reaching 52-week highs. Investors and traders tend to be bullish when the index grows above 50 and bearish if it falls below 50. A reading above 70 indicates that the market trend is higher. A reading below 30 indicates that the market has fallen. Investors need to be aware that the high-low indicator can provide extreme readings for a long period if the market is strongly trending.

Trade with the High-Low Index

The high/low index is sometimes supplemented with a 20-day moving average, then used as a signal line for traders to follow when initiating trades. A purchase signal is generated for investors if the index moves above its moving mean, and a sell signal is generated if it moves below its moving mean. Traders should use additional technical indicators to filter the signals generated by the high-low index. When the index moves above its 20-day moving average, a trader will look for the relative strength indicator (RSI) to be greater than zero as a sign that the market is experiencing upward momentum. The high-low index is another tool you can use to determine if you have a bullish or bearish outlook. When the indicator is more than 50, traders can exclusively trade on the long side of the market.

High-Low Index, Market Efficiency

The high-low indicator reflects historical data. It takes a simple moving mean of the Record High Percent's new highs and lows. It is used as a trading indicator. One of the oldest sayings in finance and capital markets is that past returns don't necessarily indicate future returns. An index with a high-low ratio may be useful in assessing the relative strength of an underlying index. However, it should not be used to generate sell or buy signals. An investor who only relies on signals from high-low indexes to buy/sell would be assuming that the market or index is not weakly efficient. This is highly unlikely.

Conclusion

The High-Low Index is a market-breadth indicator that measures the strength or weakness of an index. The indicator is most effective when used in conjunction with other analysis methods. This indicator is a simple calculation and serves as a momentum indicator to detect overbought market conditions. It calculates the difference between the most recent high and the lowest for a particular period. This gives you a range of indicators that you can use when investing.

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